What's behind the broken banks?

A look at the recent spate of dis-functions in the banking industry and some of the likely causes

By Julian Goldsmith

August 28, 2012

CIO UK

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Hardly a day goes by without a story about the UK banking community messing up in some way or other. Some of the highest profile stories of the year have been around banks side-stepping regulation and fixing the markets for their own benefit.

Alongside this, a number of high-street banking brands have also had to own up to IT breakdowns that have denied their customers access to their own accounts or exposed their details to attack in some way.

But behind these technical problems lie process disfunctions, as the banking industry struggles to cope with rapid changes in the global financial landscape, say some industry pundits.

The most recent spate of glitches being suffered by UK high-street banks began towards the beginning of the year with Yorkshire and Clydesdale Bank customers having problems making payments with their debit cards.

The problems occurred in March when the bank outsourced some payment processes to a third party, First Data.

The bank said service was quickly restored, but problems with customers’ debit cards continued for the next two months. Customers tweeted their frustrations to each other and the bank was forced to issue an apology, saying its ATMs were still able to issue cash through using the cards.

By the end of April, problems were still continuing, with customers unable to make debit card payments or withdraw cash from ATMs. First Data was squarely blamed for the disruption.

In May, HSBC customers suffered similar problems, although it was not clear whether an outsourcer was involved this time. The banks debit cards started to malfunction, denying cash payments from non-HSBC ATMs. This problem also started to affect POS transactions too.

Around the same time, Santander and Barclays customers were denied access to their own accounts over the internet. Only a segment of customers were affected and the banks said they had the situation under control after only a few hours.

RBS lossesBy the summer, it was RBS’s turn to suffer the IT gremlins. In June, a botched batch processing software upgrade by staff in its Edinburgh centre denied customers access to funds in their accounts.

In newspaper report, he said: "RBS has seen a big mushrooming in spending on technology. With hindsight maybe a bit more of that increase in spend should have been in the core, taken-for-granted systems that work every day.”

With so many IT failures within the UK banking industry, some financial institutions began to take steps to make sure they didn’t suffer the same problems. Nottingham Building Society announced that it brought a back-up upgrade forward in light of so many high-profile failures. Other organisations inside and out of the banking world appear to have followed suit.

These technical glitches come alongside a number of industry shaking scandals, from Barclays and others fixing LIBOR rates, to Standard Chartered allegedly handling funds from unauthorised sources in Iran.

What appears to draw these two strands of dis-function in the banking and finance sector is that they are being put down to flaws in process, rather than any technical shortcomings.

In his comment on CIO UK, We need a Bank IT Stress Test, and we need it now, Software Improvement Group CTO Tobias Kuipers blames a lack of proficient IT strategy management in banking for a number of decades has resulted in a patchwork of systems that cannot support today’s creative and high-octane banking processes. He recommends that an IT stress test be hardwired into banking board’s agendas.

However, other commentators say further obligations like this activity will only add to the complexity of the problem and increase the likelihood of processes breaking down, rather than provide for a more durable banking system.

A former senior IT leader in the banking industry told CIO UK that the spate of banking dis-functions is due to the over-complex and highly fragmented regulatory landscape in Europe.

Investment limitsThe new rules on the amount of capital banks have to hold means that funds are not available to develop comprehensive responses to the mountain of regulations banks have to deal with. He called for a more straightforward regulatory framework in the sector.

David Silverstone, delivery and solutions director at financial services consultants NMQA pointed to a lack of custodianship of data within the industry. More specifically, he told CIO UK that there was a lack of quality assurance testing in banking processes, driven by a need to deploy new products quickly.

“There is a serious gap between the business as a whole and the programmes of change,” he says. “Projects are given to a specific owner whose primary interests are the time and cost of the project, not the impact of project on the rest of the business, which is only considered when there is a failure.”

He recommended banks look to the automotive sector, as an example of streamlined production processes, based on strict quality control mechanisms.

What all of these commentators appear to be saying is that the checks and balances that exist to keep banks functioning is out of step with the pace of the market. Regulators and the banks themselves need to develop a streamlined, but strict approach to governing the way banks grow and develop in the future, both in terms of IT deployments and codes of practice.